Scholarship at UC Hastings

Heather Field on “Tax Loopholes”

Politicians, pundits, and countless others indiscriminately describe disfavored provisions as “tax loopholes.” Yet as my colleague and fellow tax scholar Professor Heather Field demonstrates in her recently published article, A Taxonomy for Tax Loopholes, the term lacks definitional clarity. The phrase has been used, variously, to reference statutory ambiguities, violations of the spirit of the law, preferences seen as unfairly benefiting special-interest groups, and even garden-variety tax expenditures. As a result, calling a provision a “tax loophole” does little beyond express opprobrium and, in the process, obfuscates potentially legitimate criticisms.

Professor Field’s insight is that any ostensible “tax loophole” should be understood by making two specific inquiries: (1) what is the specific tax-policy objection? and (2) who is the party responsible for the provision’s existence? By explicitly asking what tax-policy norms the provision violates, a listener can more capably evaluate the legitimacy of the speaker’s criticism. Perhaps the provision’s impact on federal revenue is problematic. Or maybe there is a fairness concern. The specific ground implicated is of less importance than the listener’s ability to use this information to assess relative import. The second prong of Professor Field’s framework requires identifying the responsible party. Only then can listeners truly understand both the speaker’s critique and the remedy the speaker is seeking. Is the speaker criticizing Congress? The judiciary? Or perhaps are well-heeled taxpayers and their advisors to blame? This inquiry can help determine not just the party responsible for the provision’s creation but also the party best situated to take corrective action.

Professor Field demonstrates the power of her taxonomy by applying it in two different contexts. First, she analyzes the carried-interest provision. To the extent critics of the carried-interest rules are concerned about the rich paying lower rates of tax, a suitable response would be to increase the long-term capital-gains rate. If instead the carried-interest provision is seen as unjustly benefiting a particular industry (i.e., private-equity firms), reworking the partnership-tax rules or more tightly regulating private-equity shops would be appropriate redress. Next, by determining that various governmental entities and private parties are responsible for the provision’s existence, we can more accurately determine what steps, if any, should be taken to find a solution.

Second, Professor Field shows that the taxonomy is also useful in assessing how different groups of speakers perceive the tax system. Professor Field applies the analysis to media reports from the 2016 presidential campaign, illustrating how descriptions of “tax loopholes” vary by both media source and ideological perspective.

The recent, profound changes in our nation’s tax laws have inspired many passionate objections fueled by rhetoric, making Professor Field’s taxonomy especially useful in today’s political climate. By providing an analytical approach by which a vague term can be translated into more direct criticism, the taxonomy elevates tax-policy conversations beyond that rhetoric to more thoughtful, reasoned discussions. However low the nation’s capacity for rational discourse on tax reform might currently be, Professor Field’s analytical approach offers an invaluable tool for getting tax-policy conversations back on track.